YPF SA (YPF) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2012 YPF Sociedad Anonima Earnings Conference Call.

My name is Steve and I will your operator today.

At this time, all participants are in a listen-only mode, we will conduct the question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes.

And now I will turn the call over to Gabriel Abalos.

Please proceed, sir.

Great, thank you, Steve.

Good morning, ladies and gentlemen, my name is Gabriel Abalos, head of Investor Relations at YPF.

I would like to thank you for joining the first YPF's first webcast presentation where we will discuss our 2012 third quarter results.

The presentation will be conducted by our CFO, Mr. Daniel Gonzalez and our strategy and business development director, Mr. Fernando Giliberti.

We will take you through our main aspects and events that explain our results both on an (inaudible) and business level, financial situation and operational progress.

Then before I hand over the presentation to Daniel I need to let you know that we will be making various forward-looking statements.

So I ask you to carefully review that cautionary statement on slide two.

Please Daniel, go ahead.

Thank you, Gabriel.

Good morning, everyone.

Thank you again for joining YPF's first earnings webcast.

I will be going through the main highlights of the quarter and follow up with the earnings, some detailed explanation on a business unit level.

And finally, we will open it up for some questions where I am going to be joined by my colleague, Fernando Giliberti and Carlos Alfonsi who is our Executive Director for our downstream business and the rest of the team who is joining me here this morning.

Just a first quick comment, all financial figures are stated in argentine pesos in accordance with IFRS.

On the third quarter of 2012, we had a record revenue of ARS17.4 billion, that's 15.5% higher than the revenues registered in the same quarter of 2011.

EBITDA topped ARS4.4 billion, almost at the same level of the third quarter of 2011.

Just to put things in context and perspective, the company's EBITDA was ARS969 million, okay, in the quarter and ARS2.9 billion year to date.

Operating income was ARS1.8 billion and net income was ARS756 million.

These are our net income figure shows the effect of regarding the non-cash, differed tax liability that has a negative impact on the quarter of ARS408 million.

The comprehensive income which considers a full effects of the application of IFRS accounting standards reached ARS2 billion which is 3.2% below the third quarter of 2011.

As a consequence of the increase in capital expenditures that reached ARS4.1 billion in the quarter and then ramp up in activity which actually doubled the number of active operating drilling rigs since the beginning of the year, production started to stabilize in line with our objective of reversing the production decline over the last few years.

In the sense crude production was 229.3 barrels per day, that is 0.6% over the same quarter of last year and 0.9% above the second quarter of this year.

One the natural gas side, production was 34.3 million cubic meter per day.

That's only 1.7% lower than the same quarter of the previous year, but again 0.9% above the second quarter of this year.

All these figures, production figures are in line with a plan presented last August, the strategic plan.

The increase in oil production coupled with the availability of million Btu quality crude oil in the local market allowed us to get back to high utilization rates in our refineries which was a 96% in the quarter.

In line with this we increased our market share in the domestic market of gasoline and diesel to 57% and 60% respectively.

That allowed us to have a stronger competitive position that should enable YPF to continue to reduce the pricing gap with our competition.

Activities in the unconventional convention formation continued, again, showing very positive results in Vaca Muerta where we have drilled 65 wells as of September 30th.

And we plan to end up the year with more than 80 drilled wells.

On the financial side, we were very active in local markets issuing three series of bonds for a total of ARS1.5 billion during the quarter and some additional issues as to the close of the quarter that we will explain in more detail towards the end of the presentation.

In the next few slides, we will compare third quarter 2012 results with the same quarter of 2011 in all cases showing figures as I said previously in Argentine pesos and focusing our analysis at the operating income level.

Comparing operating income against the third quarter of 2011, we saw a drop of 31% to ARS 1.8 billion which is mainly driven by cost increases and negative results from our affiliates that both these effects offset our higher revenues.

Sales increase by ARS2.2 billion or 15.7%.

This hike was a result of higher prices in liquid fuels and the deliveries of larger volumes of fuel oil to the domestic market.

On the other hand however, cost of sales were ARS2.3 billion higher mainly explained by an increase in production cost which was a result of both an increasing activity and an increasing in the cost of certain services.

Depreciations were higher as well reducing operating income by ARS505 million.

The increase in depreciation, those mostly related to the higher value assigned to our fix assets as a consequence of the use of the US dollar as our functional currency and the IFRS.

Also affiliates negatively impacted the result of the quarter by ARS314 million.

I will get into more detail on the results of the affiliates once we go through the upstream and downstream business discussion.

Purchases for the period was similar to those observed in the same quarter of last year showing a slight decline of approximately 1% which was mainly a result of lower imports of gasoline and diesel.

Moving on to the operating income by business, both upstream and chemical results were in line with what we experienced a year ago, and we will explain in more detail how those businesses, the increase in revenue was offset by a comparable increasing costs.

The main negative impact was in the refining and marketing business where operating income suffered a decline of ARS706 million.

It was mainly a consequence of the price increase of the crude oil that goes into our refineries both of our own production as well as that crude oil purchased from third parties.

And again, we will get into more detail later on.

Now breaking down the analysis by business, we will start by the upstream where operating income was ARS1 billion, 1.1% lower than the third quarter of 2011.

The higher revenues that you can see in the chart were fueled by a significant increase of domestic crude oil prices.

Such prices which are determined by the local market and are not directly correlated with international prices saw an increase of 15.8% percent in dollar terms reaching an average of $70.4 per barrel in the quarter.

This was an increase of approximately 28% in local currency in the last year.

However, the bulk of this increase occurred during the first few months of 2012, so we have not witnessed any meaningful increases in the last couple of months.

As for natural gas, average sales price was $1.67 per million Btu which was 5.6% below that of the third quarter of 2011 and measured in US dollars again.

And this was mainly due to a different sales mix as more gas was delivered through the residential section, that as you know carries the lowest rates.

We do expect this price of natural gas to improve in the next couple of quarters as a consequence of seasonality.

The rise in production cost which impacted in ARS1.2 million was generated by higher operation services and other service contracts with their maintenance mainly linked to more activity and in some cases to cost increases.

A meaningful portion of these increases had to do with the real equation of tariffs that have not been adjusted for some time.

Actually a good part of the service tariffs were just in the fourth quarter of last year, so we are suffering the full effect on the third quarter of this -- of this year when you compare vis-à-vis the same quarter of the previous year.

Heavy depreciation was another negative impact to the operating income in approximately ARS 411 million and higher payment of royalties to provinces due to the higher wellhead price and production increases also impacted us in approximately ARS255 million.

Affiliated companies both controlled and non-controlled turned from a positive operating income of ARS36 million last year to a negative figure of ARS236 million during the third quarter of 2012.

Two main reasons behind this behavior, first, the one-time exploration expenses of the Jaguar offshore well drilled in Guyana which unfortunately did not yield positive results.

And on the other hand, the results of Mega where we hold 38% stake and which were -- which results were negatively affected by the higher provision of expenses in connection with the tariffs for the purchase and transportation of natural gas in accordance of Resolutions 1982 issued by ENARGAS in late 2011.

Turning to the next slide, on the (inaudible) side, both natural gas and crude oil production during the third quarter of 2011 was slightly over the expected volumes in our strategic plan presented by the company in August showing the decline from the past few is starting to reverse.

Crude oil increased by 0.6% compared to the same quarter of last year to reach 229.3 thousand barrels per day.

And compared to the second quarter of 2012, we delivered an increase of 0.9% of crude.

LNG production was 40.5 thousand barrels per day during the third quarter and this was 8.4% below the third quarter of 2011.

This was due to a lower volume of gas (inaudible) in our separation plans.

As to natural gas, production reached to 34.3 million cubic meters per day in the quarter of 2012, 1.7% lower than the same period last year also showing an increase of 0.9% against the second quarter of 2012.

So total hydrocarbon production was 485,000 BOEs per day in this period compared to 491,000 BOEs per day in the same period of last year.

Refining and marketing operating income was ARS6624 million that was 53.1% below that for the third quarter of 2011.

The lower result was mainly explained by higher purchase price of crude oil for approximately ARS1.9 billion in the quarter and to a lesser extent to an increase in the purchase of biofuels that are mixed with the company's diesel and gasoline production and also to increase in transport and freight costs.

As for the revenues there was an increase of approximately 14.2% as a consequence of both price and volume increases in products sold in the local market.

For example of a quarter comparison, price of gasoline sold in the local market increased by 9.7% in dollar terms and diesel price also sold at the domestic market was raised by 14.4% in dollar terms.

As regards to exports, there was an 8.3% drop mainly in petrochemical naphtha and LPG volumes exported as higher volumes were delivered in the local market.

Continuing on refining and marketing description, starting in the second quarter of 2012, we experimented an upward trend in refinery throughput.

The volume of crude oil processed in the third quarter of 2012 was 306,000 barrels per day which are similar to the level processed in the third quarter of 2011 and again following upon in crude oil production which has increased 5.9% against the second quarter of 2012.

Volume sold to the domestic market followed the same trend similar to the same period of 2011 but showing a strong recovery against the first quarter of 2012.

Vis-à-vis the first quarter of this year products such as diesel increased by 8.6% LPG and other 28% fuel oil move from 8,000 cubic meters per day to 300,000 cubic meters per day for instance.

These increases resulted in an increase in market share already mentioned before which we see as a positive factor to increase our pricing power in the future.

As regards to our chemical business, operating income for the period was ARS361 million, that's 2% above the third quarter of last year.

Higher operating income for the quarter was mainly due to an increase in the results of Profertil where we have a 50% stake which results which to ARS158 million in the quarter.

And that was 27% above that same quarter of last year.

In addition to Profertil there was -- it is important to mention that during the quarter, we achieved higher revenues as a consequence of higher average chemical prices which unfortunately were partially offset with the increase in the price of gas that our chemical business unit purchases from our own upstream business unit.

Turning to cash flows, our cash flows from operations continues to be a strong asset as it has always been and therefore allowed us to finance approximately 85% of our increased CapEx plan with our own funds.

This is in line with the plan for next year's (inaudible) land with a plan that in a way we communicated to the market a few months ago in which we continue to grow investments while we're investing significantly all of our cash flow in the business and we're serving a very sound capital structure.

The figure of ARS1.1 billion of additional net debt allowed us to start building a cash (inaudible) to face future investments.

This is actually move evident than at the end of the quarter after we have raised additional debt with the issuance of new classes of bonds that we will comment on the next slide.

As you can see on this slide we were very active in the domestic financial markets.

We're seeing ARS.15 billion in the quarter and another ARS 2.75 billion during October and November.

There is a detailed description, but you can see the first three trenches issued in Q3 were all peso denominated with maturities ranging from 9 to 36 months and interest rates going from [16.3%] in the quarter fixed to BADLAR or BADLAR rate plus 300 and 400 basis points on the two longer trenches.

After the end of the quarter, we shoot two more trenches, those are Classes IX and X. This time dollar denominated with maturities of two and four years and interest rates of 5% and 6% in a quarter respectively.

And on November the 9th, two days from today, we will be placing our sixth trench which is basically nominated this time again with vital interest rates which we are expecting in the BADLAR plus 425 basis points area.

Again this is going to be priced in a couple of days, so this is the expectation the company has as of today and extending the tenure up to four years which is an extension of well over one year from our last issuance in pesos.

And we expect this last trench to be of a size of approximately 600 -- sorry ARS750 million.

As a result of issuance of these six classes of bonds, we will have raised ARS4.25 billion that's close to $1 billion year to date and we expect to top the market once again before year end locally.

As you CapEx is important part of our business plan, total investments of ARS4.1 billion during the quarter.

This was 14% more than the same quarter of 2011.

CapEx in upstread was ARS2.9 billion outpacing those for the same period of last year by 9%.

As clear as we mentioned, activity increased during 2012 in our upstream business.

We almost doubled the number of drilling rigs.

Within commercial activity during the first quarter of 2012, CapEx was related to increasing recovery factors both in the Neuquina Gulf San Jorge basins.

And in addition to that development and appraisal activities continued in the Vaca Muerta formation basically in the area near Loma La Lata in the Neuquina rigs basin.

Up to date, more than 65 wells were drilled, over 50 of those were completed in all of them in Vaca Muerta.

So thus we are, we believe successfully preparing ourselves for the next year's ramp up in activity in the unconventional side.

We continue the development of the pilot which we mentioned on our strategic plan targeting 132 shale oil wells both vertical and horizontal.

During the period, the investment in refining and marketing were ARS875 million, that's 25% above last year.

This quarter we started up the desulphurization projects at the Lujan de Cuyo and La Planta refineries and progressed in the coke replacement in the La Planta refinery.

In chemicals, the investments in the quarter were ARS281 million, 63% below those for the same quarter of last year affect our consequence of the advances in Catalytic Reforming project on our chemical complex in (inaudible).

To conclude, I would like to wrap up what we have just outlined and also comment on some of the milestones we have at the end of year, of the third quarter.

As you know this was the first quarter in the new management, the first full quarter in the new management.

It is also our first earnings webcast after more than 10 years and I think you can expect us to continue to communicate actively and transparently in the future.

At the same time, during this quarter, we presented our first strategic plan and as previously presented quarterly results were completely in line with that -- with that plan.

And one step at a time, we are starting to see a response in production in order to stop the decline of previous years and start a new path of growth for YPF.

Prospects for Vaca Muerta continue to be very positive both in gas and the oil window.

In terms of numbers although EBITDA was flat, vis-à-vis last year, we know that during this quarter, we have a drop in profitability which is explained as we commented earlier on the performance of the affiliates, but also on unfavorable Q2 to Q3 comparison as the increase in activity is not yet coupled with the increase in production -- in production and revenues I should say.

And also some of our price actions occurred the end of the third quarter and after the close of the third quarter.

And again we're not reflected with the revenue numbers of the quarter as of September.

But also we did see some cost increases that as I said were partly due to increased activity but also partly due to increase in pricing of services and that is definitely at the top -- a top priority in our agenda.

As I said, we have some relevant additional milestones after the end of the quarter.

You know that we were able to increase the pricing of the bond by an average of 3% in the first days of October.

So slightly we're covering the increase of crude oil that occurred at the start of 2012.

In addition to that, last week, we signed an agreement with the governor of the province of Santa Cruz to extend for an additional 25 years our concessions in that province.

The accounts were approximately 50% of our B1 reserves.

That still needs to be approved by congress, the provincial congress which we expect to occur in the next couple of days.

Yesterday, the Board of Directors approved the payment of ARS0.7 per share which is a dividend that have been established by the shareholder's meeting in July.

This will be paid on November 19th to shareholders on record on November the 16th.

Finally on the financial side, in the last couple of days, we obtained the final waiver from (inaudible) to the Change of Control Provision on our largest facility, that facility for $500 million which this finally puts an end to this debt acceleration concerns that some of the market participants had.

We believe we've had proper access to financing in the local markets with very competitive interest rates well below what we were expecting in our plan, longer tenures also.

We were able to renew and obtain new (inaudible) line of credit in the last five days.

So we are still doing our homework and we are ready to tap the international markets when it leaves that opportunity opens with no rush.

We are fully funded for the next few months.

But we can probably say that we are slowly reinstating the company in the financial markets.

So I think that concludes my presentation.

Again, thank you very much for joining us and I'd like to open up the call for some questions.

Thank you.

(Operator Instructions).

And your first question is from the line of Marcus Sequeira, please go ahead, Marcus.

Thank you very much.

Thanks for the call.

I have two questions.

The first one on the pricing of refined products, I know that you have the 3% price increase recently, but I'm just wondering if you believe it is possible to have larger increases as to offset the increasing cost that you had or that you have had over the last couple of months.

And also I'm interested to know about the decree 1277, I know that you had to -- all the company had to submit their CapEx and costs until September and I'm just wondering if how it is working, the price on different products with the cost that each company has?

How the government is working with that?

And the other question I would have is that on your funding, how much would you expect to get of additional funding in 2013 to be able to meet your CapEx targets?

Thank you very much.

Thank you, Marcus.

Let me start with the last part of your question.

We expect to raise an additional $1 billion of debt in 2013 to fund our CapEx program under the assumption that we are successful in securing a shale partner.

Okay as far as pricing of refined products is concerned, yes it is possible to increase prices.

Actually we did that last week, so we are constantly adjusting pricing to keep it up with cost increases, but also we are keeping an eye on the market attractiveness.

As Daniel mentioned during the call, the market has not been so strong lately and therefore we have decided to increase market share to keep up with our production plans.

Therefore, we are coming up with a combination of volume and prices that we are handling very delicately.

But at the end of the day, we are adjusting prices as we deem necessary.

As far as the decree 1277 is concerned, I don't see any relationship in between that and our pricing policy.

We are not dealing with any commission on that -- working under that decree to discuss our pricing policy, not at all.

All right, thank you very much.

Thank you, your next question is from the line of Andre Sobreira.

Please go ahead, Andre.

Hi, good morning everyone.

Thanks for the call.

I have two questions.

The first one, I'd like to hear your take on what happened in the US court, in the past week and if that changes your view of how much -- of how much that you can still tap?

And I would also like to know, how much do you think the local market is still the local data capacity for IPS is there?

And the third question, just like an update on the downstream project because it seems to me that some of -- some of the projects have been postponed from end of this year to the next year.

So I just like to hear a little bit on that front as well.

Thank you, Andre, let me address the first two parts of your question.

I think what happened in the US Court of Appeals, 10 days ago, it's a little bit too soon to say what kind of long-term effects it will have on the ability of a company to raise debt on the international markets.

Clearly, the (inaudible) spreads have widened that significantly.

So we are not intending to go to the markets anytime in the short term, but we do believe at some point this needs to be solved.

And when that occurs and depending on where those spreads stand at that moment when I decide to tap into international markets.

Again, the strategy of the company is to be ready and that's what we are doing.

As you know we have an MTN program in place which we have recently upsized.

We have a group of three international banks mandated to conduct this international new issue when the market opportunity allows us.

So we will make sure that the company is completely ready to tap the markets when that occurs.

As to the availability of the local debt market, it's difficult for us to give you a number of what that capacity is.

What we can tell you is that we're working with six of the most prominent local banks in placing our bonds in the local market.

And they have all expressed their view that there is a window to, again, address the markets before year end.

So we have not yet touched our ceiling in terms of what we can raise locally.

I should also mention that this last branch that we are actually issuing this week is a consequence of our reverse inquiry of a very large private institution and investor in Argentina.

Actually coming to the company with a firm commitment to buy an important part of our -- of new debt issued by a company.

So we are confident that we will be able to continue to tap the local markets, maybe not as frequently as we have in the last two months, but as we've always said, it is important for us to start addressing the international markets at some point given that size, depth, and the tenor that we can find there it's probably something that we cannot find locally.

In terms of the lasting projects, yes, there is the delay with the CCR project.

The delay is about six months, but there's also a kind of a legal adjustment on our priorities and there we speeded up the hydro treatment unit that allow us to start reducing our imports of diesel of low sulfur content.

As a matter of fact, we started to sell our own diesel of low sulfur content on our own gas station network.

So yes, there is a delay, but that is being compensated somehow with other projects in the same portfolio.

Okay.

Thanks very much.

Thank you.

And your next question is from the line of Gustavo Gattass.

Please go ahead, Gustavo.

Hi, guys.

I have a couple of questions and my initial plan was to actually look at your results more on a quarter-by-quarter basis than looking back at last year.

And if I could just let me put my two questions into context, when I look at the results you guys are booking with regards to dollars per barrel, both on the MT and on the refining side, what we saw was, let's say, a significant deterioration from the first to second quarter and another significant deterioration from the second to the third with not much of a price increase at all between the second and the third with the subsequent reduction and margin coming all from higher costs.

What I wanted to understand in the context of the answer that was already given on price increases is why didn't you guys change or why didn't you guys try to implement, I would say, more pricing during the third quarter already?

And what kind of, let's say improvement pattern should we expect?

Should we work with, I don't know, this quarter's profitability as being where we should think about things or is this going to get back to where we were in the first half or even in the first quarter?

Thank you, Gustavo.

First we made the analysis vis-à-vis last year, although we are not (inaudible) our analysis just to be as transparent and as fair as we can with the rest of the market.

Obviously looking at vis-à-vis the second quarter and more overall with the first quarter which is not a great quarter would have been more favorable for the company.

We are not satisfied with the profitability of this quarter.

That's not the level of profitability that we have in the plan for the long term.

So we do expect to improve that most on the cost side.

Again, you should bear in mind that this was a quarter where we ramp up activity and we didn't see any of the production or revenue improvements derived from that ramp up.

So we should definitely improve on the cost side and on the revenue side both on volumes, derived from this ramp up of activity I just mentioned and on prices.

Why we were not able to increase prices more rapidly on the third quarter?

It's a combination of demand that as Fernando pointed was somehow slower in this third quarter vis-à-vis the previous quarter and definitely vis-à-vis the same quarter of last year and it also has to do with our plan of step by step improved pricing power and reduce and hopefully eliminate in the medium term the pricing gap with our competition

But we are not seeing any impediments in continuing to grow our prices aligned or at the higher rates than what we have seen in terms of our cost.

And if I could follow up on just two quick points, could we just talk a little bit about the differed tax charge that was taken that the full financials (inaudible).

I just wanted to understand what it was all about.

And coming back just to your answer and now this is a follow up, with regards to cash flow itself, do you feel that the company has, I would say, a comfortable enough position to take it very slowly on the pricing policy or it is just, I don't know, a market impediment as opposed to some kind of imposition on you guys?

There was no imposition at all.

It's market driven.

It has to do with demand and it has to do with the pricing strategy that the company has established in order to regain pricing power, but we have not seen any imposition different to what other sectors in the country may have experienced in terms of increasing our prices at the [pump].

On the differed tax issue, I'd like to ask Diego Pando who's in charge of our financials to try to come up with a -- with a simple but also as technical of a response because we do understand that this is a difficult thing to understand.

Hello.

Well according on income tax (inaudible) issue, as you know is derived from the asset '12 that you probably ask to recall on income tax liability.

That is a result of the re-evaluation of our fixed asset into pesos and according to the (inaudible) currency of the company.

That compared with the fixed asset value for the Income Tax Authority that is fixed in pesos.

So as a result of the re-evaluation consequently lead the increased value of or accounting fixed asset value the different between the fixed asset value for the Income Tax Authority should be recorded as a liability for our financial statement.

It doesn't change anything in connection with the cash flow related to the income tax that we are going to pay to the Tax Authority if you compare that with the previous gap.

It's just an accounting issue.

So when the evaluation of the peso again, the dollar increased, we have to recall that liability (inaudible) to affect our net income, but it doesn't change the amount that we are going to pay compared with previous gap.

Okay, Pando, if, again, I'm sorry to take so long of the call, but I really needed the full financials to understand this issue.

Looking at what you had in the first half results, ARS47.5 billion in fixed assets and looking at what you have now ARS43.8 shouldn't the impact be the opposite because I thought that might be the issue and then I got completely puzzled by the fact that your assets are lower.

Gustavo, this is [Alejandro], good morning.

At the beginning of the year we have ARS43.8 billion in fixed asset and now we have ARS50.8 billion.

I'm sorry, then I probably typed it wrong into my spreadsheet.

So Alejandro sorry about that.

Thank you, guys.

Thank you.

Your next question is from the line of Shola Labingo.

Please go ahead, Shola.

Hello, good afternoon.

I'm just wondering is you could provide us with an update of the agreement that you have with Chevron?

And then if you can just provide us sort of an update on the (inaudible) results at Vaca Muerta?

Well, I guess I'm not able to discuss any particulars on the dealings we are doing with several companies, Chevron is one of those.

I mean as much as we do in other companies, conversations are progressing quite well.

In general people are impressed by the technical level of the team which explains the potential of Vaca Muerta.

And they are also impressed by the geological properties of the -- of the project.

So this is very encouraging for us.

And the other questions was --

About the Vaca Muerta results.

Oh, okay about the Vaca Muerta, we've been delineating Vaca Muerta as planned.

Let me check here, I guess we -- I guess we completed 17 of the 18 wells that are planned for the first nine months of the year.

And all of them has been successful.

We have tested gas wells with (inaudible).

And we are about to start long-term testing of these gas wells so as to create similar projects for natural gas as to those of crude oil.

All right.

Thank you.

I appreciate it.

You have no questions at this time.

(Operator Instructions)

Okay.

Thank you, Steve.

Thank you, everybody for being here today.

I just wanted to add that the full financial statements will be filed in Spanish version tomorrow afternoon.

And again if you have any questions, please free to contact me or anyone else at our team.

Have a good day.

Thank you for today's conference.

This concludes your presentation.

You may now disconnect.

Good day.